Does price reveal poor-quality drugs? Evidence from 17 countries

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DOES PRICE REVEAL POOR-QUALITY DRUGS? EVIDENCE FROM 17 COUNTRIES Roger Bate Ginger Zhe Jin Aparna Mathur Working Paper 16854 http://www.nber.org/papers/w16854 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2011

We would like to thank the Legatum Foundation and Legatum Institute for funding the original research. Dozens of people helped in collecting samples and testing them. In particular we thank, Thompson Ayodele, Franklin Cudjoe, Sujat Khan, BarunMitra, Amir Attaran, Lorraine Mooney and Kimberly Hess, all of whom did us great service. Matt Jensen provided excellent research assistance, and Emel Filiz Ozbay provided helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2011 by Roger Bate, Ginger Zhe Jin, and Aparna Mathur. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

Does Price Reveal Poor-Quality Drugs? Evidence from 17 Countries Roger Bate, Ginger Zhe Jin, and Aparna Mathur NBER Working Paper No. 16854, March 2011, Revised March 2012 JEL No. D18,D4,D8,I11,I18,L15 ABSTRACT Focusing on 8 drug types on the WHO-approved medicine list, we constructed an original dataset of 899 drug samples from 17 low- and median-income countries and tested them for visual appearance, disintegration, and analyzed their ingredients by chromatography and spectrometry. Fifteen percent of the samples fail at least one test and can be considered substandard. After controlling for local factors, we find that failing drugs are priced 13-18% lower than non-failingdrugs but the signaling effect of price is far from complete, especially for non-innovator brands. Thelook of the pharmacy, as assessed by our covert shoppers, is weakly correlated with the results of qualitytests. These findings suggest that consumers are likely to suspect low quality from market price, non-innovator brand and the look of the pharmacy, but none of these signals can perfectly identify substandard and counterfeit drugs.

Roger Bate American Enterprise Institute 1150 Seventeenth Street, NW Washington DC 20036 [email protected] Ginger Zhe Jin Department of Economics University of Maryland College Park, MD 20742-7211 and NBER [email protected]

Aparna Mathur American Enterprise Institute 1150 Seventeenth Street, N.W. Washington, DC 20036 [email protected]

I. Introduction Poor-quality medicine is a global public health problem. Not only do counterfeit drugs prevail, some legitimate manufacturers make substandard drugs due to inappropriate production and some genuine drugs could degrade and become substandard through inappropriate distribution. According to the World Health Organization (WHO 2003), substandard and counterfeit drugs have been found in both developed and developing countries1, accounting for more than 10% of the global medicines market and over US$32 billion in annual earnings. Even medicines sold for deadly diseases such as malaria are faked or poorly manufactured (Dondorp et al. 2004; WHO 2009). Poor-quality drugs are dangerous: they may be wrongly labeled, contain the wrong type of ingredient, formulate the active ingredients incorrectly, or be contaminated with pathogens, leading to ineffectiveness, direct harm, or even death (WHO 2003; 2010). Surprisingly, there is little economic analysis on this topic although the policy efforts to stem the flow of counterfeit and substandard medicines have begun. One policy tool is to strengthen the enforcement of intellectual property (e.g. the Anti-Counterfeiting Trade Agreement) while others argue that trademark protection does not necessarily lead to better quality control and could hurt access to quality generic drugs (Oxfam 2011).2 From the economic point of view, the harm of substandard or counterfeit drugs depends on whether consumers can tell drug quality from direct or indirect information. If poor-quality drugs can always pretend to be of high quality, consumers are deceived and manufacturers are discouraged to produce high-quality in the long run (Grossman and Shapiro 1988a). Regulatory enforcement of trademarks and quality standards could curb the proliferation of poor-quality 1 In an operation targeting online sale of counterfeit and illegal medicines, the World Customs Organization seized 1,014,043 counterfeit pills worth approximately 2,598,163 US$ in one week of October 2010. The types of drugs seized (life-style drugs, antimalarials, sleeping pills, antibiotics, and heart medications, amongst others) show that the problem now affects all countries, developed and emerging. 2 There is academic evidence that better intellectual property protection is associated with more R&D investment in pharmaceuticals or related diseases (Pazderka 1999, Lanjouw and Cockburn 2001) but none of these studies consider substandard drugs. 2

drugs and reduce consumer fraud.3 In contrast, a poor consumer may suspect low quality from the package or market cues, but still choose to purchase low price drugs in hope that low-price drugs will work sometimes and that is better than no treatment in expectation. In this case, the welfare consequence of a ban on low quality products is not so clear: on one hand, it may deprive the extremely poor of a treatment that sometimes works; on the other hand, consumer belief on the efficacy of substandard or counterfeit drugs is likely wrong and a misinformed choice could be worse than no purchase. More importantly, the issue of poor-quality drugs is not independent of drug affordability. According to WHO (2008), over 50 surveys have shown that drug prices are high in many lowand middle-income countries, with some treatments requiring over 15 days’ wages to purchase 30 day supply. Public policies – for example tariff reduction, price ceiling, and compulsory licensing of patented drugs – have tried to lower drug price, but buying potentially low-quality drugs is another way to fight against drug unaffordability, especially for the poor. This paper provides the first empirical study on the economics of poor-quality drugs with an emphasis on (1) the prevalence of poor-quality drugs in association with local regulation, income and literacy rate, and (2) the extent to which consumers can infer the likelihood of poor quality from market price and appearance of pharmacy. Drawing insights from economic theories, we show that price and quality are fundamentally linked and the fight against poorquality drugs cannot be isolated from drug affordability.

3 It is important to note that not all counterfeits will breach a trademark. A drug that claims to be Ciprofloxacin on the package but contains chalk is “falsified” but breaks no intellectual property rules since it does not infringe a competitor’s trademark.

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One reason for the limited literature on this topic is the lack of systematic data on poor quality medicines. To overcome this difficulty, we compiled original data on the price and quality of 899 drug samples across 17 developing and mid-income countries. In particular, our network of covert shoppers purchased 8 types of drugs from 185 private pharmacies and each collected drug sample went through three progressive tests ranging from visual inspection, disintegration and ingredient test, to Raman spectrometry test for the spectra of ingredients. We find that 15% of the drug samples fail the most stringent test (spectrometry). It is more difficult to read consumers' mind on their knowledge of drug quality. According to Cockburn et al. (2005), many pharmaceutical companies and governments are reluctant to publicize the problem of substandard and counterfeit drugs, fearing that the publicity will prevent patients from taking genuine medicines. Under such secrecy, consumer knowledge of drug quality is limited to self-inspection, word-of-mouth, and market cues. It is often difficult if not impossible to tell poor-quality drugs from packaging. In our data, only 3% of drug samples fail the visual test. Full information may not be available after consumption either, because drug effectiveness varies from person to person and even authentic drugs may not work well if the patient does not follow doctor's instruction. However, consumers may not be completely in the dark either: some quality information may be inferred from a large number of idiosyncratic cases and tied to observable attributes such as price and distributional channels. In our data, covert shoppers report their subjective assessment of whether the pharmacy looks “good” or “poor.” This assessment turns out to be correlated with our objective test results, but the correlation is low (with correlation coefficients ranging from 0.14 to 0.27 all with pvalue
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